Global

South East Europe Regional Economic Report (SEE RER) No. 2

Poverty Reduction and Economic Management (PREM)Europe and Central Asia (ECA) RegionThe World Bank June 5, 2012

OutlineSEE6: DEVELOPMENTS, OUTLOOK, CHALLENGES

TOWARD GOLDEN GROWTH IN SEE6I. SEE6: DEVELOPMENTS, OUTLOOK, CHALLENGES: Global contextThe world still faces several challenges. higher oil prices, reduced capital inflows, high-income country fiscal and banking-sector consolidationMost developing economies have fully recovered from the crisis. But second half of 2011 saw slowdown generating major uncertainty for global economy going forward with possible further contagion.Early 2012 signals positive, but turmoil in MayRisk of intensification of the Greek crisis and wider contagion

Global industrial production and imports improved in early 2012

But financial uncertainty increased in May

RECENT DEVELOPMENTS IN SEE6In contrast to many developing countries, SEE6 show a sluggish real output recoverySignificant external adjustmentBut rise in debt, especially public debtLabor market a significant problemCredit market improving but slowlyPoverty reduction: sluggishUnexploited potential: exportsSEE6 Real Output Recovery (20018 real GDP index=100)ALB, KOS, MKD well underwayBIH, MNE, RRB lagging. Why?

Its partly investmentExcept in MKD and KOS

But consumption and exports are weak as well

Consumption, 2008=100Exports, 2008=100SEE6 region has shifted from trade-led to domestic-demand-led growth, but demand remains sluggish

as reflected in falling inflation rates, despite higher energy prices

with remittances providing an economic and social cushionBig unexploited potential: exportsBut total public and private external debt getting too highespecially public debt (except in KOS)(% of GDP)

A (temporary?) external relief:5 year spreads of major parent banks (basis points) and Vienna 2.0

Deposits mostly recovered to pre-crisis level

but credit growth has not(nominal y-o-y growth)

and the reason is mostly NPLs

Changes in unemployment rate are worrisome (percentage points, 2011/2008)

Levels are high especially in KOS, MKD, BIH (unemployment rates)

A real worry: Specter of Jobless Growth(Change in real GDP and employment in SEE6 (left) and MKD (quarterly) in 2011)

Poverty rates are high ($2.5-5 ppp)

After income losses in 2008-9, growth has not exactly been pro-poor, except perhaps in MNE

And LITS suggest, people feel severely affected by the crisis, especially in Serbia..

mainly via loss of work hours, job or closure of business

forcing people to cope, mainly by cutting luxuries and even food

OUTLOOK FOR SEE6GLOBAL OUTLOOK--Bottom will come in 2012, growth weak thereafter

Outlook: SEE6 Growth Will Bottom Out in 2012 at 1.1% before recovering to 2.6% in 2013Real GDP growth (%)20122013ALB1.62.5BIH0.51.5KOS4.04.1MK2.03.2MNE0.51.5SRB0.53.0SEE61.12.6Key policy challenges in 2012-13: Fiscal and Public DebtSlower growth in 2012Revenue underperformancePublic debt level and dynamics MNE, SERB, ALBWage bill and pensions (esp. BIH) Financial discipline and public sector arrears (MNE, ALB, MKD)Elections in SERB, MNE (2012) and ALB, MK (2013)

Special Fiscal issues: Arrears and GuaranteesArrears emerging in SEE6Private sector (MNE, ALB, MKD)Public sector (ALB, MKD); Municipal (MNE)Combination of weakness in revenue administration, control over municipal finances, commitment controls, credit tightnessState guarantees--important in some countries (e.g., MNE, SRB)Real GDP per capita index (North and Continental Europe = 100)II.Reasons for optimism: Toward golden growth

SEE6 countries are becoming more integrated with Western Europe and the worldSEE6 countries substantially increased their external trade and trade sophisticationEuropean convergence machinereduction in income per capita gap with Western Europe is available to SEE6, but with structural reformsBut aging and shrinking workforce a major challengeTaking advantage of trade and financial flows SEE6 catching up but limited innovation, R&DReforming labor and governmentkey challenges

In Sum and the Policy Agenda2012 Difficult year; risks of contagion

Short-term challenges: Fiscal, Financial, and Social Public debt, arrears and guarantees, financial credit market, unemployment and poverty

Long-term challenges: Reforming labor and public sectors

SEE6 reforms anchored in the European future